Regional Trade Agreements – Mercosur

Mercosur is a regional trade agreement, formed in South America, which includes the founding members Argentina, Brazil, Paraguay and Uruguay. It was initiated by the Treaty of Asuncion in 1991, and “aims to eliminate all internal tariff and non tariff barriers on the flow of goods and factors of production, implement a common external tariff and harmonize numerous macroeconomic and sectoral policies” among the four founding members. Although it only has four members the arrangement has evolved to include associate members such as Venezuela, Chile and Bolivia; they can join free-trade agreements but remain outside the bloc's customs union.

Why did these countries decide to enter into a Regional Trading Arrangement (RTA)?  These agreements create unique opportunities to take advantage of economy of scale, allowing a country to export to an unrestricted market and to have opportunities to improve products in better conditions than previously encountered. They can also open protected markets that were unavailable prior to the arrangement. 

Mercosur tariff policies regulate imports and exports and the bloc can arbitrate in trade disputes among its members. In the longer term, Mercosur aims to create a continent-wide free-trade area. Although Mercosur members negotiated about 800 exceptions to the common external tariff (CET) in order to protect multiple fledging industries, the member countries have been able to capitalize on 85% of goods and services being traded free of restrictions. Although they have had some success they have also experienced some road blocks. A problem that has been experienced by Mercosur member is the informal non-tariff barriers such as administrative delays at customs and side deals between private businesses, which hinder the free flow of goods between member countries.

“Perhaps the most telling sign of Mercosur's success is that its core member countries remain part of the bloc and other countries and regional blocs want to associate with it despite its many imperfections.”

Why is it so important for developing nations to be involved in trade, and what institutions and policies exist to help developing nations?

It is no secret that developing nations rely heavily on advanced nations when referring to international trade. The exports of developing nations are primarily imported by advanced nations. The developing nations that become more open to international trade and foreign investment have a higher potential for economic growth and a better life for their citizens.

There are many organizations designed to help the development of these budding nations such as the International Monetary Fund (IMF), The World Bank, and the Organization for Economic Cooperation and Development (OECD). 

The OECD is on a mission to promote policies that will improve the economic and social well-being of people around the world. They provide an opportunity for governments to work together to share experiences and seek solutions to common problems. In essence, countries can learn from each other’s successes and failures. How great is that! Just on a human to human level this has always worked well for me, imagine how much countries can benefit from this type of forum and information sharing!

The OECD sets “international standards on a wide range of things, from agriculture and tax to the safety of chemicals”. Drawing on facts and real life experience, they are known as a statistical agency, the OECD is able to recommend policies to help make an improvement in people’s lives. “OECD uses its wealth of information on a broad range of topics to help governments’ foster prosperity and fight poverty through economic growth and financial stability. We help ensure the environmental implications of economic and social development are taken into account”.

The organization was established in 1961 and is headquartered in Paris, France.  It has 34 member countries, made up by many of the world’s most advanced countries with high-income economies.  As pointed out on the organization webpage, the OECD is currently focusing on 4 main areas:

·         Governments need to restore confidence in markets and the institutions and companies that make them function.  It must be recognized that this will require improved regulation and more effective governance at all levels of political and business life.

·         Governments must re-establish healthy public finances as a basis for future sustainable economic growth.

·         Looking for ways to foster and support new sources of growth through innovation, environmentally friendly ‘green growth’ strategies and the development of emerging economies.

·         To underpin innovation and growth, we need to ensure that people of all ages can develop the skills to work productively and satisfyingly in the job of tomorrow.

The OECD is just one example of an organization that helps improve developing nations. Although most members are developed countries, the OECD can provide budding nations vast knowledge to help promote improvements, and knowledge is power!  

Chinese tires + U.S. chicken feet = trade war.

How is this? There seems to be no link between these 2 products. Well, think again and read on.

In September of 2009, the United Steelworkers and International Trade Commission encouraged President Obama to impose a tariff on automobile and light-truck tires imported from China. American imports of Chinese tires tripled between 2004 and 2008. With four American tire factories closing in 2006 and 2007, and more expected to close in the future, the Union’s request was an effort to control competition and alleviate the disruption of the $1.7 billion market, helping to protect the jobs of American tire workers. Obama conformed and inflicted a three year tariff on Chinese tires for 35 percent the first year, 30 percent the second and 25 percent the third. This is the first time that the United States has invoked a special safeguard provision, as allowed by the WTO.

Needless to say the Chinese were not happy with this corollary and retaliated. How did they retaliate… through chicken feet. That’s right, chicken feet!

One country’s trash is another country’s treasure. 

Although chicken feet, or “phoenix talons” as the Chinese call them, would usually end up being ground into parts for feed in the United States, they are a delicacy in China. China’s production of chicken feet isn’t enough to satisfy its domestic demand, resulting in the need to import from the States. American producers benefit from the ability to sell feet to China for 20 to 30 times more than they could in the States and the Chinese benefit by having more supply to help meet their demand. More than half of China’s imports of chicken feet come from the U.S. 

As a reprisal to the tariff on Chinese tires, China’s Ministry of Commerce announced it would begin imposing antidumping tariffs ranging from 43.1% to 105.4% on imports of chicken parts from the U.S. China’s argument was that domestic producers could not sell their products and were losing money to imported chicken parts from American producers. In 2008, the U.S. exported $677 million worth of chicken to China, half of which was chicken feet that sold for $0.60 to $.80 per pound in the Chinese market, much more than they could sell for in the U.S. The fact that chicken feet sell for much higher prices on the Chinese market than they would in the U.S. proves they are not being dumped or sold below costs. The new tariffs would price American chicken feet out of the Chinese market.

So who is affected by this war? 

The consumer! That’s right; ultimately the consumer seems to always pay the price. The Chinese consumer will pay higher prices for their “phoenix talons”, as the supply decreases and the price rises and the America consumer will pay higher prices for tires due to the higher cost of domestically made tires and the tariffs that will be imposed on cheaper Chinese imported tires. 

Chinese producers have the Ministry of Commerce looking for them and the American producers have the International Trade Commission looking out for them, but as usual, no one seems to be looking out for the consumer.